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Glossary

A

501(c)(3) Tax Status

Section of the Internal Revenue Code that designates an organization as charitable, tax-exempt and nonprofit. Organizations qualifying under the Code include educational, charitable, amateur athletic, religious, scientific or literacy groups; organizations testing for public safety; or organizations involved in prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions have 501(c)(3) status or are public agencies. Often, however, grants may be made to organizations that do not have the formal designation as a 501(c)(3), in which case it is incumbent upon the foundation to do due diligence on the organization in order to ensure that its work has “charitable intent.” See also: Due Diligence, Charitable Intent and Fiscal Sponsorship.

509(a):

Section of the tax code that defines public charities (as opposed to private foundations). A 501(c)(3) organization also must have a 509(a) designation to further define the agency as a public charity. (see Public Support Test)

12 Quarter Rolling Average:

This is the length of time used to calculate an endowed fund’s average market value for the purpose of determining the spending policy. Using a rolling average smooths out short-term fluctuations and gives a clearer picture of what the true value of the endowment is.

Absolute Returns:

The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset achieves over a given period of time. See also:Total Returns

Administrative Endowment:

An administrative endowment is a special endowed fund established by a nonprofit organization or a community foundation. Its purpose is to provide the organization with grants each year to help pay for the operations of the organization or foundation.

Affinity Group:

A separate and independent coalition of grantmaking institutions or individuals associated with such institutions that shares information or provides professional development and networking opportunities to individual grantmakers with a shared interest in a particular subject or funding area.

Agency or Organizational Funds:

An agency fund is a fund established at a community foundation by a nonprofit organization for its own benefit. Because grants from the fund go back to the nonprofit that started the fund, the IRS views it differently from other donor funds. On the community foundation balance sheets agency funds are shown as “funds held on behalf of others” and are listed as a liability. If the nonprofit organization raised the funds themselves, it is shown on their balance sheet as their own funds.

Annual Report:

A voluntary report published by a foundation or corporation describing its grant activities. It may be a simple, typed document listing the year’s grants or an elaborately detailed publication. A growing number of foundations and corporations use an annual report as an effective means of informing the community about their contributions activities, policies and guidelines. (The annual contributions, report is not to be confused with a corporation’s annual report to the stockholders.)

Articles of Incorporation:

A document filed with the secretary of state or other appropriate state office by persons establishing a corporation. This is the first legal step in forming a nonprofit corporation.

Assets:

Cash, stocks, bonds, real estate or other holdings of a foundation. Generally, assets are invested and the income is used to make grants. (see Payout Requirement)

Asset Development:

Asset development is a term used to differentiate the kinds of assets that a donor might give. Assets are given from a donor’s assets rather than from income. Thus, the amount given is larger and assets are given more often. Assets are given for the long term rather than for a short campaign. The foundation professional may work over several years to facilitate the transfer of a donor’s assets to a nonprofit or community foundation. See also: Fundraising.

B

Basis Points: (BPS)

A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security. So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.

Bequest:

A sum of money made available upon the donor’s death.

“Bricks and Mortar”:

An informal term indicating grants for buildings or construction projects.

Building Campaign:

A drive to raise funds for construction or renovation of buildings.

Bylaws:

Rules governing the operation of a nonprofit corporation. Bylaws often provide the methods for the selection of directors, the creation of committees and the conduct of meetings.

C

Capacity Building:

Capacity building means to help a nonprofit organization by investing in the core costs of the organization, such as Board and/or staff training in fundraising or asset development (long-term sustainability), teaching best practices in fiscal management organization (operational capacity), rather than supporting specific programs or projects.

Capital Campaign:

Also referred to as a Capital Development Campaign, a capital campaign is an organized drive to collect and accumulate substantial funds to finance major needs of an organization such as a building or major repair project.

Challenge Grant:

A grant that is made on the condition that other monies must be secured, either on a matching basis or via some other formula, usually within a specified period of time, with the objective of stimulating giving from additional sources.

Charity:

In its traditional legal meaning, the word “charity” encompasses religion, education, assistance to the government, promotion of health, relief of poverty or distress and other purposes that benefit the community. Nonprofit organizations that are organized and operated to further one of these purposes generally will be recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (see 501(c)(3)) and will be eligible to receive tax-deductible charitable gifts.

Charitable Gift Annuity:

Typically an agreement in which cash or other assets are transferred to a charitable organization in exchange for its promise to pay the donor an annuity for life or for a term of years.

Charitable Remainder Trust: (CRT)

A charitable remainder trust is an arrangement whereby a foundation or bank trust department (the trustee) is made the nominal owner of property for the benefit of a nonprofit organization or community foundation (the beneficiary). With a CRT, a donor invests the funds in the bank and receives a tax free income for the rest of his or her life and the life of the spouse. At the death of the second person, what is left in the trust goes to the foundation. The donor can make deductions against capital gains tax at the time of the gift and its value is not counted as part of their estate for the purposes of inheritance tax.

Charitable Lead Trust: (CLT)

A charitable lead trust can be used to transfer assets to children or others at a significantly reduced tax liability. The trust makes a fixed payment to the community foundation for a specified term, measured either by someone's life or a selected number of years. After the trust term ends, the assets of the trust are either returned to the donor or passed on to children or other loved ones. If the assets are to be returned to donor, the donor receives an income tax deduction when the trust is created. If the assets are passed on to heirs, applicable estate or gift taxes on the value of the gift are reduced or completely eliminated. The tax savings from a charitable lead trust may allow you to provide significant support for the community foundation at little or no cost to heirs in terms of ultimate inheritance. This instrument is especially effective for passing a business to succeeding generations of family

Community Foundation:

A community foundation is a grant-making charity established to strengthen local communities, creating opportunities and tackling issues of disadvantage and exclusion. They help to develop an organized culture of philanthropy in a community and they “democratize” philanthropy by allowing people of all financial means to become philanthropists. Community foundations have 4 major purposes:

The work with donors who want to establish funds

They invest and manage these investments

They make grants to charitable organizations, projects and causes

They act as the community’s “neutral convener” on important community issues.

Component Fund:

An individual fund treated as part of a community foundation and permitted by the IRS to be included among the exempt assets of the foundation. The foundation’s Board must have total control over all assets – principal and income – of a component fund.

Confidentiality:

Confidentiality is the commitment to keep private the financial information and concerns of a community foundation. It applies to Board members, staff members and committee volunteers. In a community, donors put their trust in a foundation to keep their personal financial dealings private, thus information on the size of their named funds and of individual gifts should not become public knowledge. This information, when in written form, should be turned in by Board members and committee members at the end of meetings, then shredded if possible. Board and staff members of a community foundation sign a Confidentiality Agreement. Confidentiality also refers to donors who want to keep their names private when making grants. We honor their request by referring to them as “anonymous” donors.

Conflict of Interest:

There are two types of conflicts of interest: one has to do with a Board or staff member who might receive any kind of personal financial gain due to a gift to or a grant from the foundation. The second is far more common and more benign: it has to do with Board or staff members (or their spouses) sitting on the Boards of other nonprofit organizations in the community. The first type, in most cases, should be disallowed completely. For example, if a Board member also receives payment for being the foundation’s attorney, s/he should resign from the Board and simply be a contractor. In the second case, due to the likelihood that all Board and staff members are involved in some way with other nonprofits in the community, what they need to do is disclose their relationship to the other nonprofits and recuse themselves when voting on grants to those nonprofits. The point is to be transparent to other Board members and the community at large. Board, committee and staff members of a community foundation sign a Conflict of Interest agreement.

Corporate Foundation:

A corporate (company-sponsored) foundation is a private foundation that derives its grantmaking funds primarily from the contributions of a profit-making business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate, legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations. There are more than 2,700 corporate foundations in the United States with an estimated grantmaking total of $5.2 billion in 2011.

Corporate Giving Program:

A corporate giving program is a grantmaking program established and administered within a profit-making company. Gifts or grants go directly to charitable organizations from the corporation. Corporate foundations/giving programs do not have a separate endowment; their expense is planned as part of the company’s annual budgeting process and usually is funded with pre-tax income. The Foundation Center has identified more than 800 corporate foundations/giving programs in the United States; however it is believed that several thousand are in operation. See also: Foundations, Types

Cy-Pres:

From Old French, meaning "as close as possible” or “so near." When a gift is made by will for charitable purposes, and the named recipient of the gift does not exist, has dissolved, or no longer conducts the activity for which the gift is made, then the community foundation must make the gift to an organization which comes closest to fulfilling the purpose of the gift. For Boards of community foundation, this is both a legal and a moral responsibility, because the intent of the donor must be followed. See also: The Variance Power

D

Decline:

Also referred to as Denial, a decline is the refusal or rejection of a grant request. Some declination letters explain why the grant was not made, but many do not.

Demonstration Grant:

A grant made to establish an innovative project or program that will serve as a model, if successful, and may be replicated by others.

Designated Funds:

Designated funds are endowed funds established by a donor who wants one or more specific charities or causes to receive grants from the fund in perpetuity. Once these charities or causes are named, they are not changed.

Discretionary Funds:

Grant funds distributed at the discretion of one or more trustees, which usually do not require prior approval by the full board of directors. The governing board can delegate discretionary authority to staff.

Disqualified Person: (Private Foundation)

Substantial contributors to a private foundation, foundation managers, certain public officials, family members of disqualified persons and corporations and partnerships in which disqualified persons hold significant interests. The law bars most financial transactions between disqualified persons and foundations. (see Self-Dealing)

Disqualified Person: (Public Charity)

As applied to public charities, the term disqualified person includes (1) organization managers, (2) any other person who, within the past five years, was in a position to exercise substantial influence over the affairs of the organization, (3) donors and donor advisors with regard to transactions with a particular donor advised fund, (4) investment advisors to assets of donor advised funds, (5) disqualified persons of supporting organizations who are also disqualified persons of the supported organization, (6) family members of the above, and (7) businesses they control. Paying excessive benefits to a disqualified person will result in the imposition of penalty excise taxes on that person, and, under some circumstances, on the charity’s board of directors (see Intermediate Sanctions).

Donee:

see Grantee.

Donor:

see Grantor

Donor-Advised Funds (Both Endowed and Nonendowed):

Also known by its acronym, DAF, this is the type of fund established by a donor who wants all the benefits of a family foundation without the costs or administrative work inherent in a family foundation. A DAF is very flexible, allowing the donor the opportunity each year to advise the community foundation on where the grant(s) should be awarded. It is often used as a tool for a family to teach philanthropy to succeeding generations. A DAF can be either endowed or nonendowed.

Donor Designated Fund:

A fund held by a community foundation where the donor has specified that the fund’s income or assets be used for the benefit of one or more specific public charities. These funds are sometimes established by a transfer of assets by a public charity to a fund designated for its own benefit, in which case they may be known as grantee endowments. The community foundation’s governing body must have the power to redirect resources in the fund if it determines that the donor’s restriction is unnecessary, incapable of fulfillment or inconsistent with the charitable needs of the community or area served.

Due Diligence:

Due diligence are the reasonable steps taken by a community foundation before making a grant to an organization. This is particularly the case when the organization does not have nonprofit status. The foundation must ensure that the intent of the organization is charitable. The most usual way of doing this is research on Guidestar.org, calling or visiting the organization, and checking the organization’s reputation in the community.

E

Endowment:

An endowment is a pool of funds the principal of which is never invaded. By law, it is property of the foundation. In a community foundation, 5% of the fair market value of the fund may be spent each year on grants, but it does not have to be spent. The fund must be held in perpetuity. This is particularly beneficial for the donor, because his/her endowed funds will continue to provide grants to favorite charities or causes for ever. An endowed fund must be invested for a full year before grants may be made. Also see: Short-Term or Nonendowed Fund.

Excise Tax:

The annual tax of 1 or 2 percent of net investment income that must be paid to the IRS by private foundations.

Expenditure Responsibility:

When a private foundation makes a grant to an organization that is not classified by the IRS as tax-exempt under Section 501(c)(3) and as a public charity according to Section 509(a), it is required by law to ensure that the funds are spent for charitable purposes and not for private gain or political activities. Such grants require a pre-grant inquiry and a detailed, written agreement. Special reports on the status of the grant must be filed with the IRS, and the grantees must be listed on the foundation’s IRS Form 990-PF.

F

Fiscal Sponsorship:

Fiscal sponsorship is a special financial relationship between a charitable organization that hasn’t received its IRS designation as a 501(c)(3) and a community foundation. Fiscal sponsorship is a bridging mechanism that allows the charitable group to begin functioning as a designated nonprofit while their application to the IRS is being considered. From the time of submission of the paperwork to the IRS, it can take anywhere from nine months to a year to receive the designation, so being able to begin operations at once is of great benefit to the organization and to the clients it serves. While the fiscal sponsorship is in effect the organization uses the foundation’s Federal Tax ID number, but this use comes at a cost: During this period, the organization and the foundation “become one” for all financial matters. All funds in to the organization must come through the foundation, and all bills paid must come from the foundation. The organization is not allowed to hold money aside or open its own checking account. In addition, all marketing and fundraising event materials, or all grant applications written to private foundations, must be vetted by the foundation. While the relationship can be cumbersome for both parties, it is an important public service that is offered.

Foundations: Types

There are several different kinds of foundations:

Independent or Family Foundation: funds come from a specific family or family business. In the U.S. these are often large, older foundations, such as the Ford Foundation, the Rockefeller Foundation, the Charles Stewart Mott Foundation and the McKnight Foundation. Often family members comprise the Board.

Private or Smaller Family Foundations: when an individual family wants complete control over both the investments and the grantmaking, and they have about $5 million to start with, they may choose to start their own family foundation.

Corporate Foundations: The corporation or business may start its own foundation. Usually funds from the company are invested in the foundation each year, which may mean that how well the company does economically each year determines how well the foundation does. Often a business makes grants from the foundation in addition to making grants from the corporate entity itself, usually called a Corporate Giving Program. These kinds of foundations are often used assertively to market the goods or services of the company. An example of this kind of foundation is the W.K. Kellogg Foundation. See also: Corporate Giving Program

Operating Foundations: this kind of foundation is a nonprofit which may make grants, but primarily operates its own programs that it manages and seeks funds for. Examples of this kind of foundation are the Make-A-Wish Foundation, the Susan G. Komen Breast Cancer Foundation and the Tides Foundation.

Community Foundations: these foundations do not typically manage their own programs. They acquire assets, invest and manage the assets, and make grants. Known as “the community’s foundation,” funds come from many community sources: individuals, families, businesses, nonprofit agencies. Community foundations are highly regulated by the IRS, and must pass the “public support test,” which proves that no more than one-third of its assets come from any one source.

Financial Report:

An accounting statement detailing financial data, including income from all sources, expenses, assets and liabilities. A financial report may also be an itemized accounting that shows how grant funds were used by a donee organization. Most foundations require a financial report from grantees.

Form 990/Form 990-PF:

The IRS forms filed annually by public charities and private foundations respectively. The letters PF stand for private foundation. The IRS uses this form to assess compliance with the Internal Revenue Code. Both forms list organization assets, receipts, expenditures and compensation of officers. Form 990-PF includes a list of grants made during the year by private foundations.

Funding Cycle:

A chronological pattern of proposal review, decisionmaking and applicant notification. Some donor organizations make grants at set intervals (quarterly, semi-annually, etc.), while others operate under an annual cycle.

Fundraising:

Fundraising is an activity engaged in by nonprofit organizations seeking to find funding for operations or programs or projects. It typically involves an event with a theme, in which people from the community are invited and pay to participate. It could be a gala, a dance, a live or a silent auction, a carnival, a fishing contest, an art show, buying commemorative bricks, a golf tournament or some other activity. It is time specific, in that there is a limited time during which tickets are sold. The amounts of money generated can range from a few thousand dollars to over $100,000. See also: Asset Development

Funds:

There are several different kinds of funds that a donor can establish with a community foundation. They differ according to how involved the donor wants to be with his philanthropy. These funds include:

Agency Funds

Donor-Advised Funds (Endowed or nonendowed)

Field-of-Interest Funds

Designated Funds

Scholarship Funds

Community Dividend Funds

Fund Statement:

A statement of activity (the fund statement) for each fund is sent to each donor each quarter. Activity shows how much the fund has grown, whether there have been any additions to the fund, whether there have been any grants to the fund, the historic value of the fund and the amount spendable. If a donor has more than one fund with the foundation, a separate fund statement is sent for each fund.

G

Giving Pattern:

The overall picture of the types of projects and programs that a donor has supported historically. The past record may include areas of interest, geographic locations, dollar amount of funding or kinds of organizations supported.

Grant:

An award of funds to an organization or individual to undertake charitable activities.

Grant Monitoring:

The ongoing assessment of the progress of the activities funded by a donor, with the objective of determining if the terms and conditions of the grant are being met and if the goal of the grant is likely to be achieved.

Grantee:

The individual or organization that receives a grant.

Grantor:

The individual or organization that makes a grant.

Grassroots Fundraising:

Efforts to raise money from individuals or groups from the local community on a broad basis. Usually an organization does grassroots fundraising within its own constituency—people who live in the neighborhood served or clients of the agency’s services. Grassroots fundraising activities include membership drives, raffles, bake sales, auctions, dances and a range of other activities. Foundation managers often feel that successful grassroots fundraising indicates that an organization has substantial community support.

Guidelines:

A statement of a foundation’s goals, priorities, criteria and procedures for applying for a grant.

H

Historic Value:

Historic dollar value of an endowed fund is the total accumulation of all gifts to and earnings of an endowed fund. Under UMIFA, when an endowed fund dipped below the historic value (due to market devaluation) the donor was not allowed make grants. UPMIFA changed this provision, allowing invasion of principal, with the donor’s consent and Board approval, of up to 5%. See also: UMIFA and UPMIFA

I

In-Kind Contribution:

A donation of goods or services rather than cash or appreciated property.

Independent Foundation:

These private foundations are usually founded by one individual, often by bequest. They are occasionally termed “nonoperating” because they do not run their own programs. Sometimes individuals or groups of people, such as family members, form a foundation while the donors are still living. Many large independent foundations, such as the Ford Foundation, are no longer governed by members of the original donor’s family but are run by boards made up of community, business and academic leaders. Private foundations make grants to other tax-exempt organizations to carry out their charitable purposes. Private foundations must make charitable expenditures of approximately 5 percent of the market value of their assets each year. Although exempt from federal income tax, private foundations must pay a yearly excise tax of 1 or 2 percent of their net investment income. The Rockefeller Foundation and the John D. and Catherine T. MacArthur Foundation are two examples of well-known “independent” private foundations.

Intermediate Sanctions:

Penalty taxes applied to disqualified persons of public charities (see Disqualified Person) that receive an excessive benefit from financial transactions with the charity. An excessive benefit may result from overcompensation for services or from other transactions such as charging excessive rent on property rented to the charity. Unlike private foundations, public charities are not barred from engaging in financial transactions with disqualified persons as long as the transaction is fair to the charity. Penalty taxes also may apply to organization managers, such as the charity’s board, that knowingly approve an excess benefit transaction.

Internal Revenue Service (IRS):

The federal agency with responsibility for regulating foundations and their activities. On-line at www.irs.gov.

Inputs:

All the resources a group needs to carry out its activities, such as money, people, facilities, and equipment. See also: Outputs, Outcomes and Impact.

Impact:

Broader or longer-term effects of a project’s or organization’s outputs, outcomes and activities. Often, these include effects on people other than the direct users of a project, or on a broader field such as government policy. See also: Inputs, Outputs and Outcomes.

Indicator:

Information that allows performance to be measured. It is a statistical value that links an organization’s activities to their outputs and outcomes. See also: Inputs, Outputs, Outcomes and Impact.

J

Jeopardy Investment:

An investment that risks the foundation’s ability to carry out its exempt purposes. Although certain types of investments are subject to careful examination, no single type is automatically a jeopardy investment. Generally, a jeopardy investment is found to be made when a foundation’s managers have failed to exercise ordinary business care and prudence. The result of a jeopardy investment may be penalty taxes imposed upon a foundation and its managers. (see Program Related Investment)

L

Letter of Intent:

A grantor’s letter or brief statement indicating intention to make a specific gift.

Letter of Inquiry:

Also referred to as a query letter, this is a brief letter outlining an organization’s activities and a request for funding sent to a prospective donor to determine if there is sufficient interest to warrant submitting a full proposal. This saves the time of the prospective donor and the time and resources of the prospective applicant.

Leverage:

A method of grantmaking practiced by some foundations. Leverage occurs when a small amount of money is given with the express purpose of attracting funding from other sources or of providing the organization with the tools it needs to raise other kinds of funds. Sometimes known as the “multiplier effect.”

Limited-Purpose Foundation:

A type of foundation that restricts its giving to one or very few areas of interest, such as higher education or medical care.

Loaned Executives:

Corporate executives who work for nonprofit organizations for a limited period of time while continuing to be paid by their permanent employers.

Lobbying:

Efforts to influence legislation by influencing the opinion of legislators, legislative staff and government administrators directly involved in drafting legislative proposals. The Internal Revenue Code sets limits on lobbying by organizations that are exempt from tax under Section 501(c)(3). Public charities (see Public Charity) may lobby as long as lobbying does not become a substantial part of their activities. Private foundations (see Private Foundation) generally may not lobby except in limited circumstances such as on issues affecting their tax-exempt status or the deductibility of gifts to them. Conducting nonpartisan analysis and research and disseminating the results to the public generally is not lobbying for purposes of these restrictions.

M

Matching Gifts Program:

A grant or contributions program that will match employees’ or directors’ gifts made to qualifying educational, arts and cultural, health or other organizations. Specific guidelines are established by each employer or foundation. (Some foundations also use this program for their trustees.)

Matching Grant:

A grant or gift made with the specification that the amount donated must be matched on a one-for-one basis or according to some other prescribed formula.

Microfinance:

A term for financial services aimed at micro-enterprises, sole traders and individuals, usually in under-invested communities and developing countries. These services include small loans, savings facilities with no (or a very low) minimum deposit and other low-cost financial services such as insurance, money transfers or paying bills.

N

Net Agency and Net Asset Funds:

The Financial Accounting Standards Board (FASB) has a particular Standard called Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others. This Standard is called FASB 136. See also: Agency Funds

O

Operating Budget:

An operating budget is the means of accounting for the operations of a nonprofit organization or a community foundation. Using a standard chart of accounts, the organization estimates the amount of funds in, and the expenses necessary to do the work of the organization. Typical expense items include payroll, printing, telephone, rent, insurance, etc. Typical income items include individual donations, grants, income from events, etc.

Operating Foundation:

Also called private operating foundations, operating foundations are private foundations that use the bulk of their income to provide charitable services or to run charitable programs of their own. They make few, if any, grants to outside organizations. To qualify as an operating foundation, specific rules, in addition to the applicable rules for private foundations, must be followed. The Carnegie Endowment for International Peace and the Getty Trust are examples of operating foundations.

Operating Fund:

An operating fund is a fund established to help defray the costs of operation of a community foundation or a nonprofit organization. Typically, this type of fund is not endowed, but is used as a checking account to provide maximum liquidity and flexibility for the organization.

Operating Support:

A contribution given to cover an organization’s day-to-day, ongoing expenses, such as salaries, utilities, office supplies, etc.

Outcomes:

The changes, benefits, learning or other effects that result from what the project or organization makes, offers or provides: for example, a new job, increased income or improved self esteem. Outcomes can be for individuals, families, or whole communities. See also: inputs, outputs and impact.

Outputs:

The direct and tangible products from the activity: for example, the number of people trained. See also: inputs, outcomes and impact.

P

Payout Requirement:

The minimum amount that a private foundation is required to expend for charitable purposes (includes grants and necessary and reasonable administrative expenses). In general, a private foundation must pay out annually approximately 5 percent of the average market value of its assets.

Philanthropy:

Philanthropy is defined in different ways. The origin of the word philanthropy is Greek and means love for mankind. Today, philanthropy includes the concept of voluntary giving by an individual or group to promote the common good. Philanthropy also commonly refers to grants of money given by foundations to nonprofit organizations. Philanthropy addresses the contribution of an individual or group to other organizations that in turn work for the causes of poverty or social problems-improving the quality of life for all citizens. Philanthropic giving supports a variety of activities, including research, health, education, arts and culture, as well as alleviating poverty.

Pledge:

A promise to make future contributions to an organization. For example, some donors make multiyear pledges promising to grant a specific amount of money each year.

Post-Grant Evaluation:

A review of the results of a grant, with the emphasis upon whether or not the grant achieved its desired objective.

Preliminary Proposal:

A brief draft of a grant proposal used to learn if there is sufficient interest to warrant submitting a proposal.

Private Foundation:

A nongovernmental, nonprofit organization with funds (usually from a single source, such as an individual, family or corporation) and program managed by its own trustees or directors, established to maintain or aid social, educational, religious or other charitable activities serving the common welfare, primarily through grantmaking. U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code and are classified by the IRS as a private foundation as defined in the code.

Professional Financial Advisor: (PFA)

Professional financial advisors are individuals who deal with clients in the area of their finances. In this grouping we include: estate planning attorneys, general practice attorneys, financial advisors and planners, stockbrokers, bankers (especially trust officers), real estate agents, insurance agents and even funeral directors. Not only do community foundations do well to cultivate these individuals, but they should also strive to include them on their Boards and committees. PFAs and community foundations are natural allies, though it often takes some education about community foundations to make this occur.

Program Officer:

Also referred to as a corporate affairs officer, program associate, public affairs officer or community affairs officer, a program officer is a staff member of a foundation or corporate giving program who may do some or all of the following: recommend policy, review grant requests, manage the budget and process applications for the board of directors or contributions committee.

Program Related Investment:

A loan or other investment made by a private foundation to a profitmaking or nonprofit organization for a project related to the foundation’s stated purpose and interests. Program related investments are an exception to the general rule barring jeopardy investments. Often, program related investments are made from a revolving fund; the foundation generally expects to receive its money back with limited, or below-market, interest, which then will provide additional funds for loans to other organizations. A program related investment may involve loan guarantees, purchases of stock or other kinds of financial support.

Public Charity:

A nonprofit organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code and that receives its financial support from a broad segment of the general public. Religious, educational and medical institutions are deemed to be public charities. Other organizations exempt under Section 501(c)(3) must pass a public support test (see Public Support Test) to be considered public charities, or must be formed to benefit an organization that is a public charity (see Supporting Organization). Charitable organizations that are not public charities are private foundations and are subject to more stringent regulatory and reporting requirements (see Private Foundation).

Public Foundation:

Public foundations, along with community foundations, are recognized as public charities by the IRS. Although they may provide direct charitable services to the public as other nonprofits do, their primary focus is on grantmaking. To be eligible for membership in the Council, a public foundation must grant at least $60,000 yearly and must dedicate at least 50 percent of its organizational budget to a competitive grantmaking program.

Public Support Test:

There are two public support tests, both of which are designed to ensure that a charitable organization is responsive to the general public rather than a limited number of persons. One test, sometimes referred to as 509(a)(1) or 170(b)(1)(A)(vi) for the sections of the Internal Revenue Code where it is found, is for charities like community foundations that mainly rely on gifts, grant, and contributions. To be automatically classed as a public charity under this test, organizations must show that they normally receive at least one-third of their support from the general public (including government agencies and foundations). However, an organization that fails the automatic test still may qualify as a public charity if its public support equals at least 10 percent of all support and it also has a variety of other characteristics-such as a broad-based board-that make it sufficiently “public.” The second test, sometimes referred to as the section 509(a)(2) test, applies to charities, such as symphony orchestras or theater groups, that get a substantial part of their income from the sale of services that further their mission, such as the sale of tickets to performances. These charities must pass a one-third/one-third test. That is, they must demonstrate that their sales and contributions normally add up to at least one third of their financial support, but their income from investments and unrelated business activities does not exceed one-third of support.

Q

Query Letter:

Also referred to as a letter of inquiry, this is a brief letter outlining an organization’s activities and a request for funding sent to a prospective donor to determine if there is sufficient interest to warrant submitting a full proposal. This saves the time of the prospective donor and the time and resources of the prospective applicant. (see Preliminary Proposal)

R

Reserve Funds:

That portion of a nonprofit’s income funds set aside for essential, but as yet unidentified, future expenditure. This definition normally excludes permanent and expendable endowment funds, restricted funds, and any part of unrestricted funds not readily available for spending. In a perfect world, a nonprofit would have a reserve fund of up to 6 months of their annual budget before they begin an endowed fund.

Restricted Funds:

Assets that are restricted for a particular use, such as a donation made to a nonprofit specifically a named project. In a community foundation, restricted funds are any fund established by a donor, whether it is a Donor-Advised Fund, a Field-of-Interest Fund or a Designated Fund.

S

Scholarship Funds

Scholarship funds are special funds established by a donor who wants to provide an opportunity for young people to attend college but whose finances make it difficult to do so. Scholarship funds held at a community foundation are strictly regulated by the IRS. For example, the donor may sit on the selection committee choosing the recipients of the scholarship, but cannot be the dominant force making the selection. Selection committees, often made up of high school personnel, must provide their names and addresses to the foundation each year.

Seed Money:

A grant or contribution used to start a new project or organization.

Self-Dealing:

A private foundation is generally prohibited from entering into any financial transaction with disqualified persons (see Disqualified Person). The few exceptions to this rule include paying reasonable compensation to a disqualified person for services that are necessary to fulfilling the foundation’s charitable purposes. Violations will result in an initial penalty tax equal to 5 percent of the amount involved, payable by the self-dealer.

Site Visit:

Visiting a donee organization at its office location or area of operation and/or meeting with its staff or directors or with recipients of its services.

Short-Term or Nonendowed Fund:

This is also called a “charitable checking account.” It is an Agency Fund or a Donor-Advised Fund established especially because the donor knows that s/he wants to continually put funds into the account and just as frequently make grants from the fund. Funds do not have to be invested for a full year before grants may be made. It provides the donor with maximum liquidity and flexibility, but the funds are invested for the short term and therefore do not earn the greater interest generated by endowed funds.

Social Investing:

Also referred to as ethical investing and socially responsible investing, this is the practice of aligning a foundation’s investment policies with its mission. This may include making program related investments and refraining from investing in corporations with products or policies inconsistent with the foundation’s values.

Spendable:

The spendable is the amount of money each year (5%) of the fair market value of the fund that the donor may use for granting purposes. This amount is calculated at the end of each fiscal year (June 30) and shows up on the next quarter’s fund statement. The donor has the ability to spend it all during the year, or to reserve a part of it for later grantmaking, or to roll it back into principal.

Spend-Down Foundation:

A spend-down foundation refers to a time-limited private foundation spending all or part of its capital assets in furtherance of its charitable objectives, usually after the donor dies. Approximately 12% of all foundations choose to spend down their assets rather than to invest them for perpetuity. Some examples include The Atlantic Philanthropies, the John M. Olin Foundation, the Julius Rosenwald Fund, and the Donald W. Reynolds Foundation.

Supporting Organization:

A supporting organization is a charity that is not required to meet the public support test because it supports a public charity. To be a supporting organization, a charity must meet one of three complex legal tests that assure, at a minimum, that the organization being supported has some influence over the actions of the supporting organization. Although a supporting organization may be formed to benefit any type of public charity, the use of this form is particularly common in connection with community foundations. Supporting organizations are distinguishable from donor-advised funds because they are distinct legal entities.

T

Tax-Exempt Organizations:

Organizations that do not have to pay state and/or federal income taxes. Organizations other than churches seeking recognition of their status as exempt under Section 501(c)(3) of the Internal Revenue Code must apply to the Internal Revenue Service. Charities may also be exempt from state income, sales and local property tax.

Technical Assistance:

Operational or management assistance given to a nonprofit organization. It can include fundraising assistance, budgeting and financial planning, program planning, legal advice, marketing and other aids to management. Assistance may be offered directly by a foundation or corporate staff member or in the form of a grant to pay for the services of an outside consultant. (see In-Kind Contribution)

Third Sector, Voluntary Sector, Nongovernmental Organizations: (NGOs)

These are terms used for the nonprofit sector in countries outside of the United States.

TWR: (Time-Weighted Rate of Return)

The time-weighted rate of return is a measure of the compound rate of growth in a portfolio. TWR is the preferred industry standard because this method eliminates the distorting effect of contributions and/or withdrawals and so it is used to compare the returns of investment managers.

Tipping:

The situation that occurs when a gift or grant is made that is large enough to significantly alter the grantee’s funding base and cause it to fail the public support test. Such a gift or grant results in “tipping” or conversion from public charity to private foundation status.

Total Return:

Total return refers to the overall benefit of an investment. It includes both income and capital growth. See also: Absolute Return

Trust:

A legal device used to set aside money or property of one person for the benefit of one or more persons or organizations.

Trustee:

The person(s) or institutions responsible for the administration of a trust.

U

UMIFA:

UMIFA (Uniform Management of Institutional Funds Act) is the statute, adopted in varying forms in nearly all of the states, which governs the management and distribution of endowment funds by charitable organizations. It is overseen by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”). Before the 1972 enactment of UMIFA, charities generally relied on existing trust law for guidance when making investment and spending decisions related to their charitable funds. However, Board members of charitable organizations felt constrained by existing trust law for investment and spending strategies. The law’s conservative guidelines did not permit total-return investing. To avoid the appearance of imprudence, board members thus generally invested in bonds and high-yielding stocks, and avoided growth investments. This hampered the long-term growth and viability of charitable organizations. See also: UPMIFA

Unrestricted Funds:

Funds that can be used for the general purposes of a foundation or a nonprofit. For a community foundation, the unrestricted fund (often given a different name) is the pool of grantmaking dollars from which grants are made each year. See also: Restricted Funds.

UPMIFA

The Uniform Prudent Management of Institutional Funds Act was adopted by the State of Minnesota in 2008 and the State of Wisconsin in 2009. UPMIFA modernized the rules governing expenditures from endowment funds to emphasize perpetuating the purchasing power of the fund and not just the preservation of the original dollars contributed to the fund. The new standard gives charities the ability to meet current spending needs more easily, considering volatility in the value of the fund. The intent is not to permit unlimited spending, but to establish a spending policy that is responsive to short-term fluctuations in value. UPMIFA provides even stronger and more specific guidance for investing prudently by requiring those who manage and invest the charitable funds to do so “with the care that an ordinarily prudent person in a like position would exercise under similar circumstances” and, further, by requiring that certain factors, if relevant, be considered. UPMIFA also confers a duty on individuals such as managers to make use of the special skills that they possess in managing and investing charitable funds. The seven “Prudence Factors” in UPMIFA include:

Duration and preservation of the endowment fund.

Purposes of the institution and the endowment fund.

General economic conditions.

Possible effect of inflation or deflation.

Expected total return—income and appreciation of investments.

Institution’s other resources.

Institution’s investment policy.

See also: UMIFA

V

Variance Power

This is a power of the Board of a community foundation by which it may modify any restriction or condition on the distribution of grants, if the circumstances warrant. Retaining and exercising the variance power insures that the donors’ interest in the community is efficiently executed and continues to remain relevant to that community’s changing needs and opportunities. As well, the variance power is consistent with Internal Revenue Services regulations. The implications for this power is that the application of funds remains relevant to changing community conditions and that donors will know that their gifts will always be protected from obsolescence. The Variance Power is also known as Cy-Pres. See also: Cy-Pres